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Credit cards and personal lines of credit both allow you to borrow money over time until you hit a credit limit. You typically pay back what you owe on a monthly basis, paying interest on your balance.

Each method has its pros and cons (for example, while a line of credit may have a lower interest rate, it likely won’t offer rewards and may be tougher to qualify for). Here, you’ll learn the ins and outs of a personal line of credit vs. a credit card so you can decide which is right for you.

What Is a Personal Line of Credit?

A personal line of credit operates under the same concept as a credit card, with slight differences. It’s a type of revolving credit that allows you to borrow a set amount, which is typically based on your income. Here are details to know:

•   The majority of personal lines of credit are unsecured, meaning there’s no collateral at risk if you default on payments. However, you can obtain a secured personal line of credit at some institutions if you put down a deposit. This deposit will be used to pay your balance due if you default on payments, but it can also help you achieve a lower interest rate. Personal loans secured by a deposit are typically used as a method for building credit.

•   A home equity line of credit (or HELOC) is similar to a secured personal line of credit in that your house acts as the collateral in the loan. You’re borrowing against the equity in your home. If you default on payments, your house could be foreclosed on to make up the difference.

💡 Quick Tip: A low-interest personal loan can consolidate your debts, lower your monthly payments, and help you get out of debt sooner.

How Does a Personal Line of Credit Work?

Get acquainted with how a personal line of credit works:

•   As with any other credit transaction, personal lines of credit are reported to the three major credit bureaus. You will have to provide details about your financial standings in order to qualify for a personal line of credit. Typically, this comes in the form of demonstrating your income, in addition to other requirements.

•   The interest rate for a personal line of credit usually fluctuates with the market conditions, such as the prime rate. You may also have to pay a fee each time you use your personal line of credit.

•   Some banking institutions may require you to have a checking account established with them before offering you a personal line of credit. This is critical for using your personal line of credit, since the money can be transferred to a linked checking account. (In some cases, you might receive funds via a payment card (similar to a debit card) or use special checks to move the funds.

•   Personal lines of credit contain what’s called a “draw period.” During this predetermined amount of time, you can use your available credit as you please, as long as you don’t go over the limit.

•   Once the draw period reaches its end, you may be required to either pay your remaining balance in full or pay it off by a certain date after that.

What Is a Credit Card?

Is a credit card a line of credit? Not exactly. A credit card is a type of unsecured revolving credit that includes a credit limit. This limit is determined by your financial situation, which requires a hard credit check. There are credit cards for practically all types of credit scores, from poor all the way up to excellent.

Many credit cards offer rewards in the form of cash back or travel rewards. You may also receive a bonus for signing up for a new account, either as rewards or as an interest-free, introductory financing period. Also, a credit card can offer cardholder benefits such as purchase protection or travel insurance.

How Does a Credit Card Work?

Your personal bank or other financial institutions may offer their own credit cards, but you don’t have to belong to a particular bank or lender in order to qualify for a credit card. After you’ve applied for a credit card and been approved, the lender will likely set a credit limit.

•   When you make a purchase with a credit card, it constitutes a loan. At the end of each billing cycle you’ll receive a statement. You can usually avoid interest charges by paying your statement balance in full.

•   If you choose to pay a lesser amount, you’ll incur interest charges. Credit cards typically charge high interest, so it’s important to stay on top of the amount you owe, which can increase quickly.

•   If you don’t make a payment by the statement due date, you will likely also incur a late payment fee. Interest charges and fees are added to the account balance, and interest will accrue on this new total.

•   If you miss payments by 60 days typically, you could be assessed a higher penalty APR.

Recommended: Average Personal Loan Rates

Personal Lines of Credit Vs Credit Cards Compared

Now that you know a bit more about each of these options, you know that the answer to “Is a line of credit the same as a credit card?” is no. Now, take a closer look at the difference between a line of credit and a credit card.

Similarities

Both personal lines of credit and credit cards are types of revolving credit. This means you can borrow up to a certain amount as it suits you, as long as you pay the balance back down in order to make room for future purchases.

Both personal lines of credit and credit cards also report your balance and payment history to the three major consumer credit bureaus.

Differences

Here’s a quick summary of the main differences between personal lines of credit and credit cards.

💡 Quick Tip: Swap high-interest debt for a lower-interest loan, and save money on your monthly payments. Find out why credit card consolidation loans are so popular.

Pros and Cons of Personal Lines of Credit

There are times when a personal line of credit can make life much simpler. However, you may have to accept certain tradeoffs.

Pros and Cons of Credit Cards

Credit cards are a powerful financial tool you can use to wisely manage your spending. Knowing the terms of the game, however, is just as important as learning how to be responsible with credit cards.

Recommended: Credit Score vs. FICO® Score

Alternatives to Revolving Credit

Besides personal lines of credit and credit cards, there are a few other types of financial products you can use to access credit.

Personal Loans

It may be easy to get personal loans vs. lines of credit confused, but it’s crucial to know the difference. For example, a personal line of credit is a potential amount that can be borrowed. Personal loans, however, are a lump sum of money that you receive shortly after your approval. Here’s how this kind of loan typically:

•   Obtaining either a secured or unsecured personal loan requires a credit check. The potential amount you may be able to borrow ranges from $1,000 all the way up to $40,000 or more.

•   Some personal loans are taken out for a specific purpose, such as a home renovation, a personal line of credit can often be used for whatever reason crops up. For example, you may want to go with a personal loan instead of a line of credit if you need to make home renovations.

•   A personal loan rate calculator can be used to see what terms you may be able to expect. While these calculators may not give you the exact terms you’ll receive if you do obtain a personal loan, they can be a great starting place.

Auto Loan

Many people don’t have thousands of dollars sitting around to help pay towards a new car, so they use auto loans. An auto loan is a kind of personal loan that’s secured by the title of the vehicle.

If the borrower fails to pay the loan, the vehicle can be repossessed. And the name of the lender typically appears on the title of the car, so the loan must be paid off before the car can be sold.

Mortgage

A mortgage, or home loan, is a loan that’s secured by a real estate property. Because of the inherent value of real estate, a home mortgage can often have a lower interest rate than other types of secured loans. Most home mortgages are installment loans that have a fixed repayment period, such as 30 years or 15 years.

A home equity loan or a home equity line of credit is a second mortgage taken out against the existing equity in a property. Because of their low interest rates these are sometimes used instead of unsecured personal loans.

Student Loans

Student loans can allow students to fund their education; you may not need to start paying those loans off until you’ve graduated.

Federal student aid can help pay for college-related costs as well. The Free Application for Federal Student Aid (FAFSA®) is one way to determine how much and what type of federal student aid students and parents might qualify for. Some individual colleges also use the FAFSA in determining eligibility for their own financial aid programs.

Private student loans are another option, both for loans and to refinance federal loans. In terms of the latter, however, there are two important considerations:

•   If you refinance federal student loans with private loans, you forfeit the federal benefits and protections, such as forgiveness.

•   If you refinance for an extended term, you may pay more interest over the life of the loan.

•   For these reasons, think carefully about whether private student loans suit your situation.

The Takeaway

Personal lines of credit are similar to credit cards in that they are both generally unsecured loans issued based on your personal creditworthiness. By understanding how a credit card differs from a personal line of credit, you can choose the loan that best fits your needs or decide to access cash through an alternative method.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

FAQ

Here’s a list of the most common questions associated with personal lines of credit and credit cards.

Is a personal line of credit the same as a credit card?

Personal lines of credit and credit cards are similar but not the same. A credit card is a form of payment accepted by merchants and a kind of revolving loan. A personal line of credit is a revolving loan, and the funds are typically transferred to the borrower’s personal bank account before they are used for purchases. Credit cards can also have numerous benefits not offered by a personal line of credit but the interest rate may be higher.

Are there additional risks to lines of credit vs credit cards?

Both personal lines of credit and credit cards require you to pay back what you owe, whether it’s on a monthly basis or at the end of the draw period, in the case of a line of credit. Making late payments or missing payments can negatively affect your credit score and incur fees.

Do personal lines of credit affect your credit score?

Yes, personal lines of credit, just like credit cards, are subject to reporting to the major credit bureaus. If you make late payments or miss payments, your credit score can be negatively affected. However, personal lines of credit can also be used to build your credit if you make your payments on time and use your credit responsibly.

Photo credit: iStock/Deepak Sethi

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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Whether it’s a cozy micro-cabin or a rambling Colonial, your home is probably the single largest purchase you’ll ever make and your biggest physical asset. An investment like that is worth protecting.

That’s where homeowners insurance comes in; it gives you peace of mind that if you were to have major damage or get robbed, there would be funds to repair and restore your home. But what happens when you think it’s time to change your policy?

Here’s what you need to know about switching your homeowners insurance policy, as well as a step-by-step guide to getting it done as quickly as possible and with a minimum of hassles.

Can I Switch Homeowners Insurance at Any Time?

Good news: yes! No matter the reason, you’re allowed to change your homeowner’s insurance at any time. This is good, since shopping around for the right policy can save you a lot of money in some instances.

If you’re shopping for a new home as we speak, it can be a good idea to start looking at insurance before you sign the purchase agreement. And if you’re an existing homeowner looking to save money or simply find a new policy, you absolutely can do so whenever you like. But it’s important to follow the steps in order to ensure you don’t accidentally have a lapse in coverage.


💡 Quick Tip: Homeowners insurance covers three basic categories: the building itself, the belongings inside, and your liability if someone gets hurt on your property.

When Should I Change My Homeowners Insurance?

There are certain events that should also trigger a review of your insurance, including paying off your mortgage (your rates may well go down) and adding a pool (your rates may go up). Also, you may find you are offered deals if you bundle your homeowners insurance with, say, your car insurance; that might be a savings you want to consider.

You never know what options might be available out there to help you save some money. And since homeowners insurance can easily cost more than $1,800 per year, it can be well worth shopping around.

Recommended: Is Homeowners Insurance Required to Buy a Home?

How Often Should I Change My Homeowners Insurance?

You’re really the only person who can answer this one, but in general, it’s a good idea to at least review your coverage annually.

However, it does take time and effort. Sometimes, a cheaper policy means less coverage, so it’s not always a good deal. Be sure you’re able to thoroughly review all the fine print and make sure you know what you’re getting.

Ready to change your homeowners insurance? Follow these steps in order to ensure you don’t accidentally sustain a loss in coverage!

Step One: Check the Terms and Conditions of Your Existing Policy

The first step toward changing your homeowners insurance policy is ensuring that you actually want to change it in the first place!

Take a look at your existing policy and see what your coverage is like, and be sure to look closely to see if there are any specific terms about early termination. While you always have the right to change your homeowners insurance policy, there could be a fee involved. In many instances, you may have to wait a bit to receive a prorated refund for unused coverage.

Step Two: Think about Your Coverage Needs

Once you have a handle on what your current insurance covers, you can start shopping for new insurance in an informed way. You probably don’t want to “save money” by accidentally purchasing a less comprehensive plan. But do think about how your coverage needs may have shifted since you last purchased homeowners insurance.

For example, the value of your home may have changed (lucky you if your once “up and coming” neighborhood is not officially a hot market). Or perhaps you’ve added on additional structures or outbuildings and need to bump up your policy to cover those.

Step Three: Research Different Insurance Companies

Now comes the labor-intensive part: looking around at other available insurance policies to see what’s on offer. Keep your current premiums and deductibles in mind as you shop around. Saving money is likely one of the main objectives of this exercise, though sometimes, higher costs are worth it for better coverage.

Make sure you are carefully comparing coverage limits, deductibles, and premiums to get the best policy for your needs. Also consider whether the policy is providing actual cash value or replacement value. You may want to opt for a slightly pricier “replacement value” so you have funds to go out and buy new versions of any lost or damaged items, versus getting a lower, depreciated amount.

In addition to the theoretical coverage you encounter, it’s a good idea to stick with insurers with a good reputation. All the coverage in the world doesn’t matter if it’s only on paper; you need to be able to get through to customer service and file a claim when and if the time comes!

Fortunately, many online reviews are available that make this vetting process a lot easier. A few reputable sources for ratings: The Better Business Bureau and J.D. Power’s Customer Satisfaction Survey, and Property Claims Satisfaction Study. You can also do some of the footwork yourself by calling around to get quotes, though this is time-intensive and you might want to simply use an online comparison tool instead.

Step Four: Start Your New Policy, Then Cancel Your Old One

Found a new insurance plan that suits your needs better than your current one? Great news! But here’s the really important part: You want to get that new policy started before you cancel your old one.

That’s because even a short lapse in coverage could jeopardize your valuable investment, as well as drive up premiums in the future. Once you’ve made the new insurance purchase call and have your new declarations page in hand, you are ready to make the old insurance cancellation call. Be sure to verify the following with your old insurer:

•   The cancellation date is on or after the new insurance policy’s start date.

•   The old insurance policy won’t be automatically renewed and is fully canceled.

•   If you’re entitled to a prorated refund, find out how it will be issued and how long it will take to arrive.

Congratulations: You’ve got new homeowners insurance!

Recommended: Should I Sell My House Now or Wait

Step Five: Let Your Lender Know

The last step, but still a very important one, is to notify your mortgage lender about your homeowners insurance change. Most mortgage lenders require homeowners insurance, and they need to be kept up-to-date on who’s got your back should calamity strike. Additionally, if you still owe more than 80% the home value to your lender, they may still be paying the insurer for you through an escrow account — so you definitely want to make sure those payments are going to the right company.


💡 Quick Tip: A basic homeowners insurance plan doesn’t cover floods, earthquakes, or sinkholes. If you live in an area prone to natural disasters, you may want to look into supplemental coverage.

The Takeaway

Homeowners insurance is an important but often expensive form of financial protection. It can help you cover the cost of repairing or rebuilding your home if you undergo a covered loss or damage. Since our homes are such valuable investments, they’re worth safeguarding. Plus, most mortgage lenders require homeowners insurance.

Sometimes, changing your policy can help you save money for comparable or better coverage. Reviewing and possibly rethinking your homeowners insurance is an important process, especially as your needs and lifestyle evolve. If you’ve added on to your home, put in a pool, bought a prized piece of art, or are enduring more punishing weather, all are signals that you should take a fresh look at your policy and make sure you’re well protected.

If you’re a new homebuyer, SoFi Protect can help you look into your insurance options. SoFi and Lemonade offer homeowners insurance that requires no brokers and no paperwork. Secure the coverage that works best for you and your home.

Photo credit: iStock/MonthiraYodtiwong

Insurance not available in all states.
Experian is a registered service mark of Experian Personal Insurance Agency, Inc.
Social Finance, Inc. ("SoFi") is compensated by Experian for each customer who purchases a policy through Experian from the site.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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If you’re wondering whether a bank checks your credit when you open a checking account, the answer is typically no…but there’s more to the story than that one little word.

When it comes to starting a new checking account, banks don’t usually check your three-digit FICO® score — the most common score used by lenders — in order to determine your eligibility to open a checking account. They do, however, often look into your banking history via an agency known as ChexSystems.

Here’s a closer look at credit checks when opening an account and what could prevent you from getting that approval you’re after.

Whether or Not Banks Run Credit Checks for Checking Accounts

First, know that when most entities check your credit, they’re looking at that three-digit FICO score mentioned above — the one that ranges from 300 (poor) to 850 (exceptional). They will likely also receive your entire credit report, which is a detailed document listing all your open accounts, their statuses, and several years of your credit behavior, among other items.

When your credit is checked, it can be either a soft or hard credit inquiry. The former are inquiries that don’t impact your precious credit score. But the latter can wind up lowering your score because these “hard pulls,” as they are sometimes known, can indicate that you are shopping around for more credit, which can make you look like a risky prospect.

But back to our question about whether a bank will initiate a credit check…the answer is: not exactly. They typically use their own kind of financial background check system called ChexSystems. It’s a reporting agency that focuses on consumers’ banking behavior.

What Is ChexSystems?

ChexSystems is a reporting agency that focuses on your behavior around banking. Some details to note:

•   Your ChexSystems report will include your history of overdrafts, negative balances, and bounced checks, as well as any instances of fraud, security freezes, and other items specifically to do with your banking history. So while it’s not a credit check, per se, it is like a credit check, and your report could lead to your being rejected for a bank account.

•   Like any other reporting agency, ChexSystems is required by the Fair Credit Reporting Act (FCRA) to issue consumers a free report once a year, so you can regularly check your history.

•   If any of the negative items on your report are fraudulent, you can dispute that information with the agency to get it removed — and if they’re legitimate, you can work toward improving the behavior that caused them. (Most information on your ChexSystems report falls off after five years.)

•   There are also deposit accounts that don’t pull ChexSystems reports. So even if you’ve got some negative history, it’s possible to turn over a new leaf and work toward a more positive relationship with banking.

Recommended: How to Avoid ATM Fees

Why Do Banks Run Credit Checks When You Open a Bank Account?

Now that you know how credit checks work, you may wonder, Why do banks run credit checks when you want to open an account? Isn’t that their whole reason for being, to give people checking and savings accounts?

While there’s truth to that, banks do rely on their customers to keep their accounts in good order — and to pay fees, ensure checks don’t bounce, and generally be responsible bankers.

Using ChexSystems gives banks an idea of how you might behave as a banking customer in the future based on your recorded behavior. The intel in ChexSystems can also help a bank disqualify you from obtaining an account if they don’t think you pass muster.

Does It Hurt Your Credit Score When Trying to Open a Bank Account?

One exciting corollary to the fact that banks don’t pull your credit score when opening an account: Opening a bank account won’t hurt your credit score, since there’s no hard credit inquiry involved. That’s comforting news to anyone opening a new bank account. It also means you can even open a few different checking and savings accounts (perhaps you want a regular checking account, plus one for your side hustle income, as well as a savings account for your emergency fund), and you won’t negatively impact your rating.

Stressed about your credit score and not loving where it’s lingering? Building your credit score is definitely an important step toward plenty of financial goals, and the behaviors you cultivate to do so may also improve your ChexSystems report. Moves like lowering the amount of debt you carry, paying bills on time all the time, and not opening too many lines of credit can really pay off.

Reasons Why You Might Be Denied a Checking Account

Unfortunately, every now and then, people do get rejected when they apply for a bank account. For banks that use ChexSystems, these are some of the reasons for a denial.

Unpaid Negative Balance on a Previous Bank Account

As mentioned, banks aren’t officially loaning money to checking account holders — but if you maintain a negative balance on an account and never pay that money back, the financial institution is on the hook for that loss. For this reason, negative balances on existing or previous accounts can spell rejection for a new one.

Abusing Overdraft Privileges

On a similar note, overdrafting again and again hinders a bank’s ability to stay in the black on your account. That goes double if you’ve avoided paying overdraft fees or other charges associated with your behavior.

Fraudulent Activity on Previous Accounts

ChexSystems records suspected fraudulent activity — which, obviously, is not something a bank wants to have to deal with in the future.

Having a Joint Account With Someone Who Has Negative Unpaid Balances on Their Accounts

When you have a joint bank account, your partner’s behaviors can affect your standing as much as your own. So even if it’s not you who’s wreaking havoc on your bank account, the other person’s negative balances, overdraft abuses, and fraudulent activity could negatively impact your ChexSystems report.

The Takeaway

If you’re sweating whether opening a bank account can involve a credit check that deflates your credit score, don’t worry. Most banks don’t pull a hard credit check to qualify you for a checking account. However, they might look into your ChexSystems report, a banking industry way of peering into an applicant’s history. Certain negative items can disqualify you from opening a bank account.

That said, there are banks out there that don’t use ChexSystems to qualify their customers, and SoFi is one of them.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

Do banks check your credit score when opening a checking account?

While banks don’t check your FICO score to qualify you for a checking account, they may check your ChexSystems report. This is similar to your credit report but focused specifically on your banking history.

Can you be denied a checking account because of bad credit?

You likely won’t be denied a checking account because of bad credit directly. However, if you have bad credit, you may also have negative items on your ChexSystems report that could disqualify you from some (but not all) bank accounts.

Why would a bank deny a checking account?

A bank might deny your request for an account if you have negative items on your ChexSystems report, such as fraudulent activity, negative balances, or unpaid overdraft charges.

Photo credit: iStock/MicroStockHub

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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Private equity is financing from investors to invest in or buy companies that aren’t listed on a public market and then make improvements to those companies. Their goal is to sell the companies for more than they bought them for. Many people aren’t as familiar with this style of investment as they are with the public trading done through the stock market.

If you’ve ever wondered, what is private equity?, read on to learn more about what it is, how it works, and how to invest in private equity.

What Is Private Equity?

Private equity (PE) is a type of investment where qualified investors can purchase shares of companies that are not publicly traded on a stock exchange or regulated by the Securities and Exchange Commission (SEC). They typically do this through investment partnerships or funds managed by private equity firms.

With publicly traded companies, investors purchase shares of the company on a public market such as the New York Stock Exchange. With private equity, qualified investors can combine their assets to invest in private companies that aren’t typically available to the average investor.

How Do Private Equity Firms Work?

Private equity firms have funds that allow various investors to pool their assets in order to invest in or buy private companies and manage them.

These investors are referred to as limited partners. They are often high-net-worth individuals or institutions such as insurance companies. Equity firms usually require a sizable financial commitment from limited partners to qualify for this investment opportunity.

The equity firm uses the assets from investors to help the companies they invest in achieve specific objectives — like raising capital for growth or leveraging operations.

To help further these objectives, equity firms offer a range of services to the companies they invest in, from strategy guidance to operations management. The amount of involvement and support the firm gives depends on the firm’s percentage of equity. The more equity they have, the larger the role they play.

In helping these private companies reach their business objectives, private equity firms are working toward their own goal: to end the relationship with a large return on their investment. Equity firms may aim to receive their profits a few years after the original investment. However, the time horizon for each fund depends on the specifics of the investment objectives.

The more value a firm can add to a company during the time horizon, the greater the profit. Equity firms can add value by repaying debt, increasing revenue streams, lowering production or operation costs, or increasing the company’s previously acquired price tag.

Many private equity firms leave the investment when the company is acquired or undergoes an initial public offering (IPO).

Types of Private Equity Funds

Typically, private equity funds funnel into two categories: Venture Capital (VC) and Leveraged Buyout (LBO) or Buyout.

Venture Capital Funds

Venture capital (VC) funds focus their investment strategy on young businesses that are typically smaller and relatively new with high growth potential, but have limited access to capital. This dynamic creates a reciprocal relationship between VC fund investors and emerging businesses. The start-up depends on VC funds to raise capital, and VC investors can possibly generate large returns.

Leveraged Buyout

In comparison to VC funds, a leveraged buyout (LBO) is typically less risky for investors. LBO or buyouts target mature businesses, which tend to turn out larger rates of return. On top of that, an LBO fund typically holds ownership over a majority of the corporation’s voting stock, otherwise known as controlling interest.

Can Anyone Invest in Private Equity?

When it comes to how to invest in private equity, only qualified or accredited investors are allowed to become limited partners in a private equity fund. Because private equity funds are not registered with the SEC, they don’t require SEC security disclosures. Thus, investors must understand the highest risk of such investments and be willing to lose their entire investment if the fund doesn’t meet performance expectations.

Since the initial investment is typically pretty high, and may be well into the millions of dollars, an individual must meet strict criteria to qualify as an individual accredited investor. A person must make over $200,000 per year (for two consecutive years) as an individual investor or $300,000 per year as a married couple. Alternatively, an investor can qualify as accredited if they have a net worth of at least $1 million individually or as a married couple to qualify (excluding the value of their primary residence), or if they hold a Series 7, 65, or 82 license. Other examples of accredited investors include insurance companies, pension funds, and banks.

How to Invest in Private Equity

Many private equity funds require very large investments that are out of reach for many individuals. And directly investing in private equity funds is not possible for investors who are not accredited. However, there are an increasing number of options for average investors seeking to gain exposure to private equity, including:

Exchange-traded funds (ETFs): Investors can invest in ETFs that have shares of private equity firms.

Publicly traded stock: Some private equity firms have publicly traded stock that investors can buy shares of. This includes PE firms like the Carlyle Group, the Blackstone Group, and Apollo Global Management.

Funds of funds: Mutual funds are restricted by the SEC from buying private equity, but they can invest indirectly in publicly traded private equity firms. This is known as funds of funds.

Interval funds: These closed-end funds, which are not traded on the secondary market and are largely illiquid, may give some investors access to private equity. Interval funds may invest directly or indirectly through a third-party managed fund in private companies. Investors may be able to sell a portion of their shares back to the fund at certain intervals at net asset value (NAV). Interval funds typically have high minimum investments.

💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

Advantages and Disadvantages of Private Equity

While private equity funds provide the opportunity for potentially larger profits, there are some key considerations, costs, and high risks investors should know about.

Advantages

Here are some possible benefits of private equity investments.

Potentially Higher Returns

With private equity, returns may be greater than those from the public stock market. That’s because PE firms tend to invest in companies with significant growth potential. However, the risk is higher as well.

More Control Over the Investment

Private equity investors are typically involved in the management of the companies they are invested in.

Diversification

Private equity investments allow investors to invest in industries they may not be able to invest in through the public stock market. This may help them diversify their holdings.

Disadvantages

The drawbacks of investing in private equity include:

Higher Risk

Private companies are not required to disclose as much information about their finances and operations, so PE investments can be riskier than publicly traded stocks.

Lack of Liquidity

Private equity funds tend to lack liquidity due to the extensive time horizon required for the investment. Since investors’ funds are tied up for years, equity firms may not allow limited partners to take out any of their money before the term of the investment expires. This might mean that individual investors are unable to seek other investment opportunities while their capital is held up with the funds.

Contradicting Interests

Because equity firms can invest, advise, and manage multiple private equity funds and portfolios, there may be conflicts. To uphold the fiduciary standard, private equity firms must disclose any conflicts of interest between the funds they manage and the firm itself.

High Fees

Private equity firms typically charge management fees and carry fees. Upon investing in a private equity fund, limited partners receive offer documentation that outlines the investment agreement. All documents should state the term of the investment and all fees or expenses involved in the agreement.

Private Equity Comparisons

Private equity is one type of alternative investment, but there are others. Here’s how a few of them compare.

Private Equity vs IPO Investing

From an investor’s standpoint, private equity investing means you’re putting money into a company, and hopefully making money in the form of distributions as the company becomes profitable.

Investing in an IPO, on the other hand, means you’re buying stocks in a new company that has just gone public. In order to make money, the company’s stock price needs to rise, and then you need to sell your stocks in that company for more than you initially paid.

Private Equity vs Venture Capital

Venture capital funding is a form of private equity. Specifically, venture capital funds typically invest in very young companies, whereas other private equity funds typically focus on more stable companies.

Private Equity vs Investment Banking

The difference between these two forms of investing is of the chicken-and-egg variety: Private equity starts by building high-net-worth funds, then looks for companies to invest in. Investment banking starts with specific businesses, then finds ways to raise money for them.

The Takeaway

Private equity firms manage funds that invest in private companies that might otherwise not be available to investors. Sometimes these companies are small and new with high growth potential; in other cases, the companies are well-established, and may offer a higher rate of return.

Not everyone qualifies to invest in private equity. If you do qualify, it’s important to remember that while private equity funds may offer the opportunity for profitability, they also come with some hefty risks. As with any investment, it’s a good idea to make sure you fully understand the risks of investing in a private equity fund before moving forward.

Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.

FAQ

What’s the history of private equity?

Pooling money to buy stakes in a private company can be traced back to 1901, when JP Morgan bought Carnegie Steel for $480 million and merged it with two other companies to create U.S. Steel. That is considered one of the earliest corporate buyouts. In 1989, KKR bought RJR Nabisco for $25 billion, which, adjusting for inflation, is still considered the largest leveraged buyout in history.

How does private equity make money?

Private equity firms make money by buying companies they consider to have value and potential for improvement. PE firms then make improvements, which in turn, can increase profits. These firms also benefit when they can sell the company for more than they bought it for.

How much money do you need to invest in private equity?

Private equity funds typically have very high minimum investments that are often tens of millions of dollars. Some firms may have lower requirements around $250,000. In addition to putting up the minimum investment amount, an individual needs to be an accredited investor with a net worth of at least $1 million or an annual income higher than $200,000 for at least the last two years.

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

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